1. Households, both as consumers and resource owners.
2. Businesses demand resources and supply goods and services.
3. Government also demands resources and supplies primarily services.
4. The Rest of the World
The circular flow model shows the relationships between these four sectors.
Services are intangible activities used to satisfy human wants.
Without scarcity, there would be no economic problem and no need for prices
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( 1. takes advantage of individual preferences and natural abilities,
2. Allows workers to develop more experience at a particular task,
3. Reduces the time required to shift between different tasks, and
4. Permits the introduction of labor-saving machinery.)
2. Land: all natural resources – all so-called “gifts of nature”.
3. Capital: goods that are used to produce and distribute other goods and services.
4. Entrepreneurship: managerial and organizational skills needed to start a firm, combined with the willingness to take risks.
How will goods and services be produced?
How much should be produced?
For whom will goods and services be produced?
Remember: An economic system is the set of mechanisms and institutions that resolve the what, how, how much, and for whom questions. Some criteria used to distinguish among economic systems are (1) who owns the resources; (2) what decision-making process is used to allocate resources and products, and (3) what types of incentives guide economic decision makers.
Rational choice takes time and requires information, but time and information are scarce and valuable. Rational decision makers will continue to acquire information as long as the additional benefit expected from that information exceeds the additional cost of gathering it.
You, as a rational decision maker, will change the status quo as long as your expected marginal benefit from the change exceeds your expected marginal cost.
The Fallacy of Composition: what is true for the individual, or part, must necessarily be true for the group, or whole.
The Mistake of Ignoring the Secondary Effects: unintended consequences of economic actions that may develop slowly over time as people react to events.
Analogical Fallacy: taking a comparison to its logical extreme.
The Fallacy of Absolutes
Resources are employed fully and efficiently when there is no change that could increase the production of one good without decreasing the production of the other good.
Our model’s simplifying assumptions:
1. We limit the output to just two broad classes of products.
2. The focus is on production during a given time period—in this case, a year.
3. The resources available in the economy are fixed in both quantity and quality during that period.
4. The available technology does not change during the year.
3. Opportunity cost
4. The Law of Increasing Opportunity Cost
5. The need for choice
2. Individual freedom
4. Incredible variety of
goods and services.
5. High degree of
1. The product must satisfy a want or a need.
2. The consumer must be able to pay for the product.
3. The consumer must be willing to take both, the desire and the ability, to the market.
Problems:: By setting the price above the equilibrium price, we are
Creating more surpluses and may be adding to the government debt
Problems:: Setting the price below the equilibrium price will create
more shortages and encourage illegal activities such as black markets
in the price of the product will results in a
larger percentage change in the quantity
demanded. The elasticity of a product is
determined by the availability of substitutes,
the percentage of income, and the urgency of
Inelastic demand says a large percentage
change in the price of the product results in a
small percentage change in the quantity
2. the prices of relevant resources,
3. the prices of alternative goods,
4. producer expectations,
5. the number of producers in the market, and
6. changes in the “rules of the game.”
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